Last week, a friend asked my opinion on how this untenable situation could persist.
"We're probably already in the worst recession the nation has faced since the 1930s yet the stock market keeps moving higher. How?"
Who could be faulted for his wretched state of confusion regarding today's economic environment? It is unprecedented. The next 12 months is pea-soup opaque to even the most astute observer. Forecasting what comes next? May as well give a quick shake of The Magic Eight Ball so I might convey my keenest insights.
Because anyone, be they Carl Icahn or Karla Icon, who posits that they know what's next has no more useful insight than that cylindrical Nostradamus that once sat beside my bed.
"Most wise and enigmatic Magic Eight Ball, can the market continue its bullish trajectory amid a tsunami of irrefutably bad economic data and societal challenges?"
A cursory glance through the hazy, microscopic window would enable you to squint into the black watery depths and-- if the lighting was perfect -- quickly discern the future.
The responses were always concise. Crystal clear. And filled with insight.
"As I see it, yes... Ask again later... Better not tell you now... Cannot predict now... Concentrate and ask again... Don't count on it... It is certain... It is decidedly so... Most likely... My reply is no.. My sources say no... Outlook good... Outlook not so good... Signs point to yes... Very doubtful... Without a doubt... Yes
Yes, definitely... You may rely on it..."
At that point, who would not be prepared to allocate a lifetime's savings to an investment strategy supported by your market-maven investment advisor, The Magic Eight Ball.
In more prosaic times, we might use banal concepts like earnings projections as a critical factor in determining the value of share prices. Such projections help determine vital insights like price-to-earnings and other related metrics (i.e. P/E, PEG and P/S ratios, current and future share value, EV/EBITDA), and even gross domestic product (helping to gauge the health of the economy).
Today, as the pandemic disrupts industries from travel to manufacturing to retail, the consensus is that such measures are doomed to fall. Yet, stocks continue to rally. The S&P 500 index has rocketed 38 percent off the March low. Money managers attribute much of the bounce to stimulus from the Federal Reserve. But the disconnect between rising stock prices and a lack of economic visibility lends an eerie tone to the rally. Bringing investors to hesitate before jumping back into equities. While simultaneously suffering from FOMO (fear of missing out) should stocks continue climbing.
The dispersion among analysts as to how far earnings may fall has reached the highest level seen since May 2009. Immediately after the Great Recession Bear Market's nadir. No wonder. Companies have increasingly suspended financial guidance. Realizing the optics of the Q2 earnings announcement were they to continue acting like they know anything helpful at all.
"And we couldn't be more proud of our ability to protect our employees while continuing to serve customers and maintain the industry's highest standards. With that, I'll turn the podium over to my CFO, The Magic Eight Ball."
The S&P 500 plummeted 34 percent between February 19 and March 23. Having rebounded sharply since, and cutting its losses for the year to eight percent. Roughly 10 percent below February's record high. The index currently trades at similar levels on a trailing and forward basis at 19.4 and 20.46 times earnings, respectively. That compares with the five-year averages of 20.18 and 16.92.
GDP forecasts -- the value of all goods and services produced across economies -- have been revised sharply lower.
JPMorgan Chase expects the 2020 global economy to contract by 4.8 percent, and the U.S. to fall 7.6 percent. Credit Suisse projects a more modest 1.9 percent decline globally and a 3.3 percent domestic decline. With the lack of data and precedent bringing economists to seek new sources of insight, including everything from online sales projections, Google Trends and restaurant-reservation and delivery companies like DoorDash and OpenTable.
The big Silicon Valley stocks (Alphabet, Amazon, Apple, Facebook and Microsoft) comprising roughly 20 percent of the S&P 500's market value have reported uplifting results. Underscoring the viability of their models in meeting consumer needs regardless of the challenges. Other companies across a variety of industries have nosedived. Like retail, airline, hotel, travel and tourism stocks.
We remain committed to the three prospective outcomes consistently highlighted in these missives, (here). Believing that investors forgo the immediate gratification of rash decision making in favor of well-conceived action plans that marshal the facts and historical precedents in order to leverage some historical probabilities:
1) This time is not different.
2) History repeats itself (or rhymes like hell).
3) Human psychology hasn't changed.
Now is not the time to let the Eight Ball determine an investment strategy. But the time to observe what empirical evidence is available so that we might better discern what the tea leaves are telling us. That path provides an opportunity to benefit during these unprecedented times. Those abiding by the The Magic Eight Ball's investment process will rue the day that savvy billiard-themed Machiavelli gained so much influence.
Still, we'll take all the insight we can get.
Magic Eight Ball, should I maintain a 10-percent cash position in preparation for the inevitable pullback? Or do I increase my risk profile in order to leverage the opportunities available in this new bull market?
Reply hazy. Try again.